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Legislator takes measures to discipline SMS lenders

09.12.2008

The Estonian Parliament is currently working on a bill amending the General Part of the Civil Code Act and the Law of Property Act. The bill was triggered by the problems with the SMS loans, especially the high interest and late payment interest charged by the lenders.

The bill elaborates the regulation of transactions which conflict good morals. The new regulation would render a transaction void, if at the time of its conclusion a party to the transaction knew or should have known that the transaction was contingent upon an exceptional need, dependency or inexperience of the other party or upon other similar circumstance, and the transaction has been made on extremely unfavourable conditions for the other party or if the value of mutual obligations of the parties is in an imbalance, which is against good morals.

The amendments proposed in a bill are aimed at situations, where a transaction is void due to an unreasonable imbalance between the amount of the loan and interest charged thereon and such imbalance is against good morals. In such case the borrower is entitled to repay the amount of the loan by the date on which he or she was to repay the loan in full under the void loan agreement. In such case the borrower is to pay interest on the loan only at the minimum rate prescribed by §94 of the Law of Obligations Act. The amendment aims to motivate lenders to abandon the practice of ultrahigh interest rates.

Furthermore, the bill removes the floor limit for application of the provisions of consumer credit (currently 200 euros). This means that the provisions regulating consumer credit in the Law of Property Act would also be applicable to SMS loans, which thus far have fallen beyond the aforesaid floor limit. Consequently, SMS lenders would have to inform the consumers as stipulated by the Law of Obligations Act and consider the consequences of not doing so. It is also important to note that the provisions regulating consumer credit prohibit lenders from charging higher interest on overdue loan repayments than stipulated by law (the interest rate prescribed by §113 (1) of the Law of Obligations Act).

The proposed amendments are expected to take effect as from 1 January 2009.

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